If you want to become a profitable options trader, you need to know how to spot opportunities and trade them correctly. One particular opportunity comes through a solid understanding of the different candlestick patterns and how to trade them correctly. The Hammer vs Hanging Man candlestick pattern go hand in hand. The Hammer represents a bullish signal, and the Hanging Man represents a bearish chart signal.
Below, we discussed the hammer vs hanging man candlestick patterns. Once you know these patterns and how to analyze them, you can start using them.
Benefits of the Candlestick System
Candlestick patterns can serve as a traders’ charting approach to predict future market movements. Candlestick signals possess one primary trait not present in other technical systems: the signals are created by investor sentiment, psychology, and behavior changes.
A trader does not have to be knowledgeable about technical charting to take advantage of these signals. Instead, the graphical form of a signal makes reversals immediately visible.
So why isn’t candlestick analysis used more? The answer is that the candlestick patterns have typically been too labor-intensive, requiring a steep learning curve before the trader gains confidence. This post provides you with a simple training program to overcome those obstacles.
Forming the Candlesticks
The candlesticks are created using the open, high, low, and close price data from a given period. The candlesticks are then used to create patterns that can be analyzed for future market predictions.
Each candlestick line consists of a real body and wicks.
The body is the difference between the open and close. If the close is higher than the open, the body will be clear or empty. If the close is lower than the open, the body will be solid or filled.
The lines extending from the body represent the extremes of the price movement during the day. These are known as the shadows, also known as wicks. The wicks are created by the high and low price data points. The wick above the body is the upper wick, and the wick below the body is the lower wick or the tail. The length of the wick has necessary implications for the strength of reversal moves.
Reversals
Candlestick patterns are one of the most popular charting techniques traders use because they are easy to spot and can be used in any market condition. While there are many different candlestick patterns, we will focus on two specific reversal patterns – the hammer and the hanging man candlestick pattern.
Three General Types of Candlestick Patterns
- 1. The Hammer and the Hanging Man: Reversal patterns occur at the end of a downward or upward trend.
- 2. The Inverted Hammer and Shooting Star: Reversal patterns occur at the end of a downward trend or an uptrend.
- 3. The Doji: This is a unique candlestick found at the top or bottom of a trend and is considered a neutral pattern.
The Hammer and Hanging Man Candlesticks
The Hammer vs Hanging Man candlestick patterns are like siblings, and now that you know how to form the candlesticks and the different types, it’s time to learn how to spot patterns. But, again, for this lesson, let’s focus on the hammer and the hanging man reversals, which are two of the most popular ways to signal a potential change in a trend.
These bullish and reversal patterns form when there is a small body with a long shadow. The wick can be either above or below the body, but it must be at least twice as long as the body itself.
The Hammer Candlestick
This pattern forms when the price trades lower than the open but rallies close to the end of the day.
Hammers are most effective when preceded by at least three or more declining (aka rally) candles. A rally candle closes higher than the close of the candle before it. The candle should have a small body with a long shadow. The wick can be either above or below the body, but it must be at least twice as long as the body itself.
To Spot a Potential Hammer Candlestick Pattern: Look for
- Three or more declining candles should precede the candlestick.
- The candle should have a small body with a long shadow.
- The wick can be either above or below the body, but it must be at least twice as long as the body itself.
- Ideally, the next candlestick will gap up and close.
A hammer should look similar to a “T.” This indicates the potential for a hammer candle. However, a hammer candlestick does not imply a price reversal to the upside until it is confirmed.
The confirmation comes with the next candlestick, which should ideally gap up from the hammer candle and close near its high. If the next candlestick does not gap up, it is still a bullish reversal pattern, but it is not as strong.
The Hanging Man Candlestick
The hanging man pattern is formed when the stock price trades higher than the open but sells off to close near the low. This pattern is very similar to the hammer, except it forms during an uptrend.
To Spot a Potential Hanging Man Pattern: Look for
- The stock price is in a uptrend.
- The candle has a small body with a long lower shadow.
- The wick is at least twice as long as the body itself.
- The candle is followed by a selling day.
Like the hammer, the hanging man has a small body with a long shadow. The wick can be either above or below the body, but it must be at least twice as long as the body itself.
In other words, traders want to see that long lower wick to verify that sellers stepped in aggressively during the formation of that candle.
Key Takeaways
- Candlesticks provide all of the elements needed for successful options trading.
- They identify where the buying or selling is occurring.
- They are accurate.
- They eliminate emotion and instill discipline.
- They enhance existing technical methods.
- They tell you when to get into and out of a trade.
While these candlestick patterns can be useful, they should not be the only factor you consider when making trading decisions. Instead, use them in conjunction with other technical indicators and fundamental analysis to get a more well-rounded market picture.
Summary: Hammer vs. Hanging Man Candlestick Pattern
Just a quick recap, the Hanging Man candlestick pattern is a type of pattern that refers to the candle’s shape and appearance. It represents a potential reversal in an uptrend on your chart. Meanwhile, the Hammer candlesticks pattern indicates a potential price reversal to the upside. The price must start moving up following the formation of the hammer in order for it to be confirmed. Don’t forget to consider market context, trends, and volume when making your decisions. Candlestick patterns are just one tool in the toolbox – use them wisely!
The Hammer and Hanging Man candlestick patterns are great tools to use in any strategy, especially with supply and demand, which you can learn from the Maurice Kenny Day Trading Program.
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